Focus 100 Retail: Rebounding markets and hard surface gains - Nov 2016
By Darius Helm
This year, the top flooring retailers and residential contractors are making solid gains, in most cases up by high single digits and even double digits, driven by both strengthening markets and taking marketshare from smaller retailers that aren’t as visible to consumers. Residential buying groups also report that sales are up.
Today, roughly 10,000 independent specialty flooring retailers still exist in the U.S. market. Numbers started falling a long time before the Great Recession, but since 2006 at least a quarter of those still in existence either went under or were bought out. And the vast majority are doing it all on their own, with only about 3,000 affiliated with buying groups.
Those on the Top 100 list are generally well established and have multiple locations. They have invested in refined advertising and marketing programs, increasingly including sophisticated online strategies. Many have diversified into the commercial, multi-family and builder sectors, or into product categories beyond flooring. So their gains are generally a notch higher than the average gains.
The truth is that this is not a huge growth year for flooring, by any means. In fact, it looks like residential sales will be up only by low single digits. Carpet sales are down by about 2%, but hard surface flooring is up around 7%, on average.
Builder business is fairly strong, particularly in rebounding markets like Florida, the Carolinas, Colorado and Las Vegas. Multi-family business is still robust, though it’s showing signs of peaking. Retail business is trailing the field, but still making gains.
It looks like business was generally robust for the first half of the year, but slowed down earlier than normal in many markets. And markets where activity has been highest have generally been held back by installer shortages. Many of those in the hottest builder markets have been frustrated by their inability to keep up with demand and get projects completed, and that’s been holding down annual revenues. The silver lining is that these conditions will likely extend the length of the growth cycles—lower growth rates over a longer period of time. And some might argue that they’d prefer five years of steady growth to moving constantly from peak to trough.
This year has seen some acquisitions among flooring dealers, the most notable of which is the purchase last May of HD Supply, formerly known as Creative Touch Interiors, by Interior Specialists Inc. (ISI), a major residential flooring contractor based in California. Having weathered the recession, Interior Specialists started to make gains again, and about three years ago it acquired some of its competitors—Phoenix’s Heritage Interiors, Seattle’s SuperFloors and Las Vegas’ Del Grosso Floor Covering.
A couple of years ago, ISI was itself acquired by Littlejohn & Co., a private investment firm based in Greenwich, Connecticut. In 2015, the firm acquired New Jersey’s Advanced Flooring Design. And in May of this year, it acquired HD Supply, which had been struggling to compete with the strengthening ISI business. All told, Interior Specialists now has about 2,500 employees, 65 warehouses and 91 design centers. Revenues this year should top $515 million, up from $450 million in 2015.
KEY FLOORING TRENDS
Overall, the single hottest product type in the industry is WPC, an inflexible waterproof tile with a PVC face and often a cork back, and Shaw Industries’ newly acquired US Floors, which invented the category, has the hottest WPC product, Coretec. Price barriers limit its use in some applications, like most apartment turns, but in general WPC is penetrating the entire market.
Luxury vinyl tile and plank is taking share not just from other hard surface categories but also from carpet. LVT is part of a group of flooring types dominated by wood looks. Others are laminate, ceramic tile and hardwood itself. While laminate seems to have lost the most share to LVT in recent years, retailers report that laminate flooring is now holding its own in many markets. Hardwood sales are up, boosted by lower price points, and ceramic sales are up as well. Sheet vinyl sales are more sluggish, and felt-backed sheet goods seem to be losing share in today’s market.
Carpet used to account for well over half of residential flooring sales, but these days its share is steadily falling. Today, there are two opposing forces in residential carpet, the low price points of PET carpet at one end and the design and performance of higher end carpet, including programs like Stainmaster’s PetProtect, at the other end. Retailers report that the higher price points are helping to buoy the category, but the lower end of the market is still very active, so there’s a lot of volume at the entry level.
Many retailers commented that consumers seem increasingly willing to spend more for carpet. Part of the reason seems to be because they’re getting used to hard surface price points, which are generally higher, so the prices for good carpet don’t faze them. Another reason, according to retailers, is that homeowners have started to shift from whole-house remodels to doing things one room at a time, and since they’re only using carpet in nesting areas, like bedrooms and dens, they’re willing to make larger investments to get the look they want.
Another trend with carpet is rugs. Retailers all around the country say they’ve seen an uptick in cutting and binding broadloom into custom rugs. Lots of retailers have these sorts of programs, though there hasn’t been a lot of demand for them until recently. But the shift from broadloom to hard surface flooring seems to be leading homeowners to turn to rug formats for both acoustic properties and comfort underfoot.
The actual area rug category is showing some growth, though not really among independent flooring retailers. Rugs need lots of showroom space and lots of inventory, never mind a lot of foot traffic. And it’s increasingly difficult to match all the competition from online, where e-tailers don’t need showrooms and warehouses.
E-commerce firms have been doing particularly well with rugs, and they’re starting to gain traction with sales of other types of flooring as well. Wayfair, for instance, also sells hardwood, laminates, vinyl, bamboo, cork, and ceramic floor and wall tile. And some brick and mortar flooring stores, like Worldwide Wholesale, are setting up their own e-commerce sites for area rug sales.
The only major flooring category that is underrepresented in the residential market is carpet tile. Interface’s Flor does a good job with a range of residential tile options, from utilitarian to high fashion, but right now it’s only a $42 million business. However, Shaw has signaled that it will introduce residential carpet tiles once its new facility in Adairsville, Georgia is fully up and running. And it’s likely that Mohawk will follow suit. And Engineered Floors recently showed some residential carpet tile prototypes at the National Floorcovering Alliance’s meeting in Aruba, so it may also enter the market in the coming year.
In all likelihood, the carpet tile these firms showcase will be more about performance than design. And it won’t go head to head with broadloom, since carpet tile can’t compete with broadloom’s soft hand and lower average price points, and broadloom can’t compete with carpet tile’s high performance and DIY installation—and of course the ability to swap out tiles, change patterns and even move the tile from one room to another.
HOUSING MARKET UPDATE
Overall, new home sales and existing home sales have continued to climb through 2016, not necessarily with steady gains month to month but steadily above numbers from the previous year. For instance, sales of new single-family homes dropped 7.6% in August from July to a seasonally adjusted annual rate of 609,000, but were up nearly 21% from the August 2015 numbers. Compare that to the national average from 1963 to 2016 of 652,450, the all time high in July 2005 of 1.389 million and the low in February 2011 of 270,000.
According to the National Association of Realtors (NAR), September’s existing home sales were up 2.4% to a seasonally adjusted annual rate of 5.17 million from 5.05 million in August, and that includes not just single-family homes, but also townhomes, condos and co-ops. Single-family home sales were up from August by 2.0%, while condos and co-ops were up 5.2%. And compared to September 2015, condos and co-ops were about flat, while single-family home sales were down 1.9%.
Privately owned housing starts were weak in September, down 9% from August to 1.047 million. That’s nearly 12% below the September 2015 rate. What’s interesting is that single-family housing starts were actually up 8.1% from the previous month, but multi-family housing starts plunged 38%. Nevertheless, permits are up in September, 0.4% for single-family homes and 16.8% for multi-family units.
It looks like the multi-family market may be about to peak. One sign is year-over-year rent declines in some of the nation’s highest priced markets, and it’s pulling down the national average. According to Axiometrics, the average effective rent nationwide was $1,289 per unit in third quarter of 2016 compared to $1,251 in the third quarter of 2015. That’s up 3%, compared to the 5.2% growth rate a year ago. In the three metro markets with the highest rents, San Francisco, New York City and San Jose, rents are down 0.5%, 0.2%, and 0.8%, respectively. Houston, which is a large market though not a high rent market, rents are down 2.8%. Nationally, occupancy in the third quarter was 95.1%, compared to 95.2% in the second quarter of 2016 and 95.4% in the third quarter of 2015.
A National Association of Home Builders (NAHB) study from earlier this year reveals that the average regulatory costs incurred in building a new single-family home have climbed nearly 30% from $65,224 in 2011 to $84,671 this year, while disposable income per capita only rose 14.4%.
In all, regulations from all levels of government add up to nearly 25% of the final price. The study claims that 60% of that cost comes from the higher price of finished lots and the balance from costs incurred by the builder after purchasing the finished lot.
However, the study also showed that the percentage of the total cost going for regulations was about the same as in 2011, so the increase is largely based on the actual increase in new home prices.
Some experts feel that the impact of these regulations on the market has been to slow the sales of entry-level homes, which should have been more of a post-recession growth engine. In fact, the NAR reports that first-time buyers continue to be under-represented in the market, accounting for less than 30% of all buyers for 17 of the last 18 months.
INDEPENDENT FLOORING DEALER HIGHLIGHTS
One of the largest flooring retailers in the South is Atlanta Flooring Design Centers, which has been in business for 30 years and has five locations: Atlanta, Georgia; Chattanooga, Tennessee; Birmingham, Alabama; and Charlotte and Raleigh, North Carolina. The Atlanta and Chattanooga locations are retail stores, while the other locations focus on the single-family builder market along with some commercial work. The Chattanooga business, acquired in 2015, is called the Chattanooga Flooring Center.
The single-family builder market accounts for approximately three-quarters of the firm’s flooring revenues, with commercial business making up another 15% or so, and retail at less than 10%. Flooring sales this year should top $90 million, up about 20% from 2015.
In addition to flooring, the firm has been selling cabinets for the last four years. And for about two decades, it has been operating a carpet cleaning division. Carpet cleaning isn’t necessarily a profit center for Atlanta Flooring Design, but it serves to strengthen relationships with existing customers and also generate word-of-mouth referrals.
The firm sells every type of residential flooring, though its rug business is largely custom area rugs and bound broadloom. Carpet sales make up 45% of total flooring revenues, though a lot of that comes from the commercial side. Residentially, the largest volume comes from polyester carpet in the builder business. However, it also offers higher end broadloom, including branded nylons. On the hard surface side, ceramic is the biggest part of the business, followed by hardwood. Fastest growing is LVT, including WPC constructions. Laminate sales are flat to down.
All of Atlanta Flooring Design’s installers are subcontractors, and, like everyone else, the firm struggles to find enough installers to get the jobs done. Another challenge is operating costs, which continue to rise, driven largely by health insurance costs.
Macco’s Floor Covering Center, which is a member of the National Floorcovering Alliance, has operations in Wisconsin and Florida. Its Florida business is Hadinger’s of Fort Myers, purchased in 2012. In Wisconsin, the firm has six Macco’s Floor Coverings retail operations as well as Macco’s Commercial Interiors, which covers Wisconsin and several surrounding states. Commercial work, which is up significantly this year, is heavily focused on the healthcare segment.
Revenues from the residential side are up this year, with growth in all regions, though none stronger than Florida, which is booming. Most of the growth in Florida is coming from new construction, with the firm targeting the higher end, though it has also been doing a lot of insurance work down there as well. Its Wisconsin businesses also target the higher end of the market.
Overall, residential sales account for about 60% of total revenues, half retail and half builder, though builder is gaining faster. Installation labor is a challenge, leading to long lead times. Macco’s has started working to attract young people to the craft, and it has hired and trained several installers right out of high school. And it also works with veterans’ groups.
LVT is showing the strongest growth right now, led by US Floors’ Coretec and some other WPC programs. Wood and ceramic business is strong, while laminates are flat to down. But the weakest segment right now is carpet. Flooring sales for the year should top an estimated $41 million.
West of the Mississippi are two major Berkshire Hathaway businesses, Nebraska Furniture Mart and RC Willey, that have a similar business model, selling flooring, furniture, appliances and electronics. And both are NFA members.
Nebraska Furniture Mart is a massive $155 million business that operates out of four locations. At 24,000 square feet, the firm’s smallest store is in Des Moines, Iowa. The original location in Omaha, Nebraska features 420,000 square feet of retail space in several buildings, as well as huge warehouse space. The location in Kansas City, Kansas, which opened in 2003, totals 1.1 million square feet, including a 450,000-square-foot showroom. And the most recent location, in The Colony on the outskirts of Dallas, Texas, has the biggest retail space at around 560,000 square feet in addition to 1.3 million square feet of warehouse space. The Texas location opened in the spring of 2015.
Flooring sales should be up by double digits this year, in part because of growth from the Texas business. Activity in the upper Midwest has been subdued this year, so there’s not that much organic growth.
Carpet sales have been good at the upper end, with increased demand for patterned goods—it looks like homeowners are willing to spend more on carpet as they use less of it in their houses. Rug business is up this year by high single digits, driven by growth in machine-made rugs as well as cut broadloom rugs.
On the hard surface side, laminates are struggling while LVT is surging. WPC sales have been so strong that Nebraska Furniture Mart has had to split it from LVT so it can be monitored more closely.
Like most retailers, installation issues continue to be challenging. Nebraska Furniture Mart uses subcontractors for installation, and it can have trouble lining them up, particularly when the firm runs promotions. Operating costs are also up, driven by everything from health insurance costs to TV and radio advertising rates during the election season.
RC Willey has nearly a dozen locations, six of which are in Utah. It also has three stores in Nevada, one in Boise, Idaho, and one in Rockland, California, near Sacramento. And it is breaking ground on a new store in southern Sacramento, to open in 2018. The firm also recently remodeled its main store and headquarters in Salt Lake City, with a grand opening last month.
RC Willey sells appliances, furniture and electronics, in addition to flooring, which makes up close to 10% of total sales. Both carpet and hard surface flooring is showing gains for 2016, with hard surface leading the way. And within hard surface, nothing is selling as fast as WPC. The firm was an early adopter with US Floors’ Coretec, which still accounts for about 90% of total WPC sales. RC Willey sells WPC as a laminate upgrade—LVT is not currently a huge category for the firm—and total laminate sales are up 17%.
Carpet is showing modest gains, with stronger sales of premium fibers compared to polyester. The firm does 90% of its business in residential remodeling, so it doesn’t really play in the mainstreet, multi-family and builder markets to any significant degree.
Business has been strong for RC Willey this year, with sales up an estimated 8%, driven by 20% hard surface growth. The firm’s Labor Day sale was its biggest to date, with $14 million in sales company-wide in a single day.
The leading independent flooring retailer in the Pacific Northwest is Great Floors, with 16 retail operations in Washington and two in Idaho. The firm also has a granite fabrication business in Idaho. Most of Great Floors’ revenues come from retail, but it also does contract commercial, single-family builder and multi-family builder and apartment turns. About 10% of its business comes from apartment turns. Its multi-family builder business is part of its contract commercial business. This year, total flooring revenues are up by nearly 20% to an estimated $154 million.
Like RC Willey to the south, laminates are also strong for Great Floors. Hardwood sales are up this year as well. LVT is taking share from carpet, mostly on the multi-family side. While LVT’s total cost is higher than carpet, it may not be as profitable in the long run because of its longer lifecycle.
The firm, which is a member of Starnet on the commercial side and FloorExpo (FEI Group) on the builder and multi-family side, targets the middle to mid-high market for retail, and its builder business, while covering the full range of price points, also focuses on the higher end. While Great Floors faces challenges with installers, the firm still manages to keep residential installation schedules down to about two weeks, compared to its local big box competition, where installation is generally six to eight weeks out.
The firm’s carpet business is fairly healthy, and a surprising amount of it is PET, including some higher end products. Most of the PET goes into multi-family installations as well as entry-level homes.
Airbase Carpet & Tile Mart is a major East Coast flooring retailer, with seven retail stores in Pennsylvania, three in Delaware and one in Charleston, South Carolina. It also has a wholesale operation in Dalton, Georgia. Airbase, a member of the NFA, has seen a lot of activity so far this year, with sales up by nearly double digits to an estimated $56 million.
The firm reports that the cost of business has been escalating, driven by overtime costs for employees along with the cost of advertising and healthcare insurance.
While carpet still makes up about 50% of Airbase’s flooring revenues, all the growth is on the hard surface side. And that hard surface activity is also helping to drive area rug sales. The firm has a substantial area rug program, and now it’s also seeing increased demand for its custom bound broadloom program, which it has been offering for years. Airbase has air tables in all of its stores, enabling it to bind broadloom cut to any shape and size. With that program growing, Airbase is elevating its offering and creating a wider range of price points.
One of its strongest growth categories is WPC, mostly Coretec from US Floors. Hardwood and ceramic are also on the increase.
Also serving the Pennsylvania market is Touch of Color, a FloorExpo member with nine locations in Pennsylvania and one in Richmond, Virginia. The firm has three Big Bob’s franchises, three Touch of Color Design Groups (the one in Pittsburgh is new this year) and four builder/commercial/multi-family operations, including the one in Richmond, which is also new this year.
The firm does about 85% of its business in the residential market. The biggest piece of its business is builder, which accounts for about 50% of revenues, followed by multi-family at about 25%. Contract commercial work makes up another 15%, and the remaining 10% is retail. This year, sales are up close to 20% to an estimated $45 million.
On the commercial side, the firm is currently focused on growing its senior living business, and it also has a strong position in tenant improvement and hospitality. In multi-family, Touch of Color does both new construction and apartment turns. According to the firm, both parts of the multi-family business are still in growth mode.
Single-family builder business is also very active. And retail business, which is mostly through the Big Bob’s stores, is also growing. In fact, the firm will be opening up its fourth Big Bob’s next year in York, Pennsylvania, midway between Harrisburg and the Delaware border.
Touch of Color sells the full complement of flooring, including hardwood, ceramic, vinyl flooring, laminate, broadloom and even carpet tile. Big Bob’s also sells some area rugs, mostly closeouts. Retail price points focus on the mid-range. LVT and WPC products are doing well in all channels. The firm reports that carpet prices are trending upward. However, entry-level carpet is weak at retail, as is felt-backed sheet vinyl.
The firm subcontracts most of its labor, though it’s trying to shift more in-house. In fact, it has started an in-house training program and also works with local trade schools to take on apprentices.
Flooring retailers come in every shape and size, like Ollie’s Bargain Outlet, an $870 million firm that went public last year (NASDAQ: OLLI). The firm has about 230 locations in 19 states stretching from the deep South to New England. Flooring is one of the firm’s 21 departments, though just five of those departments (flooring, housewares, packaged food, bed and bath, and books and stationery) account for 60% of sales. Ollie’s 2016 flooring sales are estimated to top $90 million, up around 15% from 2015.
Ollie’s flooring portfolio is far from typical, comprising remnants, room-sized area rugs, carpet tiles, sheet vinyl and laminates—with area rugs accounting for the biggest portion. Customers won’t find this year’s introductions in Ollie’s stores, but last year’s styles seem to satisfy its customer base. And fortunately, flooring fashion moves slower than, say, clothing fashion, so last year’s styles are generally still fairly hot.
The firm’s customers are mostly DIY homeowners or property owners, though some contractors also source material from its stores. Ollie’s competes with stores like Home Depot and Walmart, rather than flooring specialists.
The firm opens about 30 new stores a year. One of its newest markets is Florida, which it entered in May of this year. As of this month, it already has six stores in the state. Ollie’s intends to go nationwide and has announced that it has the potential to operate up to 900 stores.
Another unique operation is Interface’s Flor, which sells direct to the consumer a range of residential carpet tiles. The firm has 19 Flor stores in the U.S., targeting major metro markets, as well as a store in Toronto. And the firm has a master distributor relationship for sales in approved locations in Mexico and Latin America. The firm also sells a lot online and through its catalogs, accounting for about a third of total sales. Flor mails about two million Flor catalogs every year.
Flor’s carpet tiles don’t compete with traditional broadloom. Rather, the tiles are used to make area rug designs, which, thanks to the FlorDots installation system, can be swapped out, moved, resized and redesigned according to the whims of the consumer.
Flor’s high profile target is the urban, fashion forward community, with most of its sales to Gen-Xers, though those who are sampling and signing up for catalogs and emails are increasingly Millennials. However, this year the fastest growing segment is probably mainstreet, with growing demand for the carpet tiles in small commercial applications like boutique offices.
In the last year, Flor has revamped its technology platform, logo and brand identity. The retooled website includes lots of selling features that were previously analog, and its new Design Studio allows consumers to choose whatever degree of customization they are comfortable with. Previously, customers would design their own rug patterns by choosing individual tiles. Now, Flor offers three avenues: they can create their own designs, use a template to guide their process or simply select a rug pattern designed by the firm. Flor currently offers about 70 collections averaging ten colorways each.
Pierce Flooring & Design, an NFA member, has seven locations in Montana, serving both the residential and commercial markets. Residential business, including builder and multi-family work as well as retail, makes up around 60% of revenues, and mainstreet and contract commercial accounts for the balance. Multi-family work is more focused on new construction than on apartment turns.
Business in the Bakken oil region—centered on North Dakota—has been sluggish over the last couple of years, as drilling has ground to a halt as a result of low crude oil prices. But Pierce has still been busy, led this year by commercial business, and sales are up by low double digits to an estimated $48 million. Residential replacement, however, is fairly stagnant this year.
The firm’s Billings location also sells cabinets, countertops and appliances, through an acquisition that was literally next door, and that business has been doing well.
In terms of flooring, the strongest category for now is WPC, including Coretec, but recently, with all the new WPC players, the category is flirting with a race to the bottom. LVT itself is in a growth mode in all channels. Montana is an arid state, which can be challenging for hardwood, so wood look LVT is always in high demand.
Carpet, however, is struggling, and now accounts for just over 40% of revenues. While there’s good demand for fashion forward, higher end products from firm’s like Shaw’s Tuftex and divisions of the Dixie Group, the low end is pulling down the category.
Guy’s Floor Service serves the Colorado market with two Denver locations and one in Colorado Springs. Builder business accounts for about 60% of revenues, and commercial business, which includes multi-family, makes up another 20%. Residential remodeling accounts for 8%, and another 12% comes from countertops through one of its Denver divisions. The firm currently leases its Colorado Springs location, but is building its own, which should be up and running at the beginning of next year.
Multi-family business, which for Guy’s means new construction but not apartment turns, has been booming. And single-family builder business has been steady. Remodel business, which targets the medium to high end, is not a major focus for the firm. Most of its remodel business comes from previous customers, and it’s driven largely by word of mouth, so Guy’s doesn’t do much in the way of advertising or promoting it. Total flooring sales are up by low double digits this year and should top an estimated $63 million.
Most of the firm’s installers are subcontractors. Guy’s has lots of established relationships with installers, but it’s also constantly recruiting because there simply aren’t enough installers in Colorado. In fact, construction growth in Denver is being limited by availability of labor in general. Guy’s has advertised for installers as far away as Nevada and Arizona, with some success.
The hottest products are luxury vinyl tile and plank, including huge demand in multi-family applications, taking a lot of share from laminates. However, the firm reports that its laminate offering has improved in terms of quality and design.
Worldwide Wholesale is a New Jersey based business with locations in Edison, Fairfield and Lawrenceville. Retail accounts for at least 75% of revenues, but this year most of the growth has come from builder business as well as multi-family, both new construction and apartment turns. Revenues are up by mid single digits this year and should top an estimated $32 million. The firm, which is an NFA member, is currently celebrating its 25th year of business.
Worldwide Wholesale sells all categories of flooring, along with countertops and window coverings. It’s one of the few retailers with a well-established area rug business, with some of its success coming from the large amount of space it allocates for the category. However, it has seen increased competition from Internet sales, so it recently launched its own e-commerce site, therugcorner.com, which has been gaining traction. The firm also has three floor cleaning operations, one for tile and stone, one for hardwood restoration and another for carpets and area rugs.
Carpet business is about flat this year, with slow growth at the lower end and more activity at the higher price points, which include woven wool products. Some of those high-end broadlooms are also being turned into bound area rugs. Hard surface business has been very strong, led by LVT, though hardwood and laminate are also up. WPC products are doing best on the retail side, and they’re starting to gain traction in multi-family as well.
H.J. Martin and Son, based in Green Bay, Wisconsin, got its start in 1931 when founder Henry John Martin started selling tile out of his garage, installing it himself. His son, Patrick, went into commercial flooring, along with glass glazing and window installation, and his son, Edward, the current president and CEO, came into the firm in 1978 and started to grow it nationally, adding drywall and ceilings as well as retail fixtures. The firm now has three business divisions: a residential division that does both retail and builder business; a contract commercial business that does work in all 50 states; and a “Retail Solutions” division, the largest part of the business, that does retail fixture installation for a range of retail stores, including big boxes.
The firm, which is a member of Carpet One on the residential side and Starnet on the commercial side, offers the full complement of flooring. Fastest growing is LVT and ceramic tile. WPC products like Coretec are strong, including in higher end apartments. The firm also offers carpet tile, though that’s mostly in commercial and light commercial applications. In multi-family, carpet tile is installed in corridors but not in units.
H.J. Martin has retail locations in Green Bay and Neenah. However, on the commercial side, rather than physical locations, it has a number of installation teams (including about 140 flooring installers) who are employees rather than subcontractors, and they literally travel around the country going from project to project. On the residential side, the firm has a team of 54 in-house installer artisans.
H.J. Martin and Son is also actively cultivating new talent for its installation teams. It partners with local veterans’ organizations, as well as with the Northeastern Wisconsin Technical College and Fox Valley Technical College to recruit workers, and also participates in mentoring programs in high schools.
Retail advertising programs focus on digital over print media, along with radio and TV. On the digital side, the firm works on social media sites like Facebook and Instagram and recently has added Houzz to its platform.
It looks like 2016 will be a record year for the firm, with flooring sales up by around 25%, with comparable growth in retail, builder and commercial business. And since the turn of the century, the firm has also been offering commercial and residential floor care services, which don’t generate massive revenues, but rather serve to sustain existing relationships. Flooring sales this year should top $37 million.
GROUPS & SERVICES
The independent flooring retailer’s greatest competition comes from home centers and other big box stores that offer affordably priced floorcoverings, and more recently from the Internet too. Over the last couple of decades, firms like Home Depot and Lowe’s have succeeded in taking a lot of share from the smaller specialized retailers, and in the process thousands of mom and pop establishments have closed their doors. The buying groups seek to neutralize some of the advantages of these national chains by banding together smaller businesses in order to match the buying power of these larger entities and compete more effectively. Beyond pricing, buying groups offer other advantages, like exclusive product lines, advertising programs, best practices, digital media platforms, and much more.
The largest of all the groups is CCA Global, which comprises several sub-groups, including seven focused on flooring: national retail groups like Carpet One Floor & Home and Flooring America & Flooring Canada; the International Design Guild, with its focus on the luxury side of the market; The Floor Trader’s outlet stores; the ProSource wholesalers; and FEI Group’s Home Solutions and MultiFamily Solutions flooring contractor groups, known collectively as FloorExpo. All told, it accounts for 2,000 or so locations across North America, mostly in the U.S., about half the number of locations of Home Depot and Lowe’s combined.
CCA Global was founded in 1984 by Howard Brodsky and Alan Greenberg, and its first flooring group was Carpet One. ProSource was added in 1991, followed by Carpet One Canada and the International Design Guild in 1995, Flooring America and Flooring Canada in 2000, and FloorExpo in the same year. Across the years, other groups were formed and sometimes folded into each other. Starting in 2000, CCA began adding non-flooring groups, like Lenders One, Lighting One and The Biking Solution, then BizUnite, Innovia Community Management Cooperative and the Lionsbridge Contractor Group. About seven years ago, the cooperative also added CCA for Social Good, focused on childcare centers. Currently, it is affiliated with nearly 7,000 childcare centers.
It looks like 2016 will be a growth year for CCA’s flooring members. Many regional markets are strengthening, and few are contracting. The higher price points are strong this year, and the middle weak. And the low end is lowering, but the bulk of the Carpet One and Flooring America members don’t compete at those entry-level price points, at least not in residential remodeling.
To address the shortage of qualified installers, CCA teamed up with the World Floor Covering Association (WFCA) early this year, shortly after the WFCA’s purchase of the Certified Flooring Installers Association (CFI). One of the goals is to incentivize members of CCA’s flooring groups to go out there and recruit budding craftsmen with discounted training costs through CFI.
CCA’s FEI Group comprises not only FloorExpo’s Home Solutions and MultiFamily Solutions, but also KBx, a B2B group for kitchen and bath dealers, and it recently it created K&B Alliance, whose members are industry suppliers and decorative plumbing and kitchen and bath showrooms. A lot of the FloorExpo members also operate as flooring retailers, others do contract commercial work, and some do all of the above.
FEI’s annual meeting, which took place in mid-September in Chesapeake Bay, had record attendance with over 450 people at the event. Most reported strong growth for the year. Both multi-family and single-family numbers are up. There are signs that the multi-family market is peaking, but it hasn’t had any significant impact on this year’s sales. Next year’s numbers will tell that tale. While many of those on the multi-family side focus on either the new construction side or on the high-volume, low-margin apartment turns side, it’s not uncommon, especially in smaller towns, for a single entity to work both businesses.
In those markets that are strong, like Las Vegas, Atlanta, parts of California, Colorado, Indiana, Florida and much of the Southeast, single-family home growth is hobbled by installation bottlenecks, more so than in slower markets. Multi-family business is strong in the Phoenix market, where single-family builder business has turned the corner.
Another major retail flooring group is Abbey Carpet Co., made up of the Abbey Carpet & Floors group and Floors To Go, which was formed 14 years ago and has a smaller national presence. The original Abbey has been around for nearly 60 years.
Average member sales for the two groups are up by mid single digits for the year, with momentum shifting from multi-family to the residential replacement market, with most builder business also in a growth mode.
At the 2017 Abbey Carpet & Floor and Floors To Go convention, to take place in early February in Atlanta, Georgia, new websites will be rolled out for both groups. The websites have responsive designs, so they adjust to every mobile device. Enhanced content on the sites includes an image gallery with room scenes for all product types as well as a catalog with images of thousands of SKUs. The convention will also feature a focus on merchandising, and a range of new products will be introduced, with an emphasis on hard surface floorcoverings.
Abbey also offers a proprietary pay-per-click program called Customer Connect for qualified lead generation. And its Performance Plus Rewards program, introduced at the 2016 convention, allows salespeople to take advantage of premiums on a wide range of qualifying products. Other programs feature direct mail pieces as well as video and print advertising.
Members of Abbey’s groups confirm that hard surface has over-performed, led by WPC and LVT. Hardwood has been strong, driven not just by wider widths and enhanced styling, but also by price points coming down over the last year or two. And laminates, which had been taking a beating, seem to have stabilized with improvements at the higher price points. Rugs, however, remain a difficult category for many members, with exceptions from those that have established sufficient showroom space and invested in substantial inventory.
Alliance Flooring, another major group, is made up of CarpetsPlus ColorTile and Carpetland, as well as its direct-to-the-trade group, Floorco. This year, membership is up again, with 28 new CarpetsPlus ColorTile members, bringing the total for all groups to 386, so it looks like Alliance is well on the way to climbing back over 400.
Total member sales are on target for 5% growth this year, and just about all of those gains are on the hard surface side, with carpet flat in yardage but up marginally in dollars, driven by a strong higher end. In fact, the group’s number one display is its Color Wall, which showcases medium to high-end carpet. Laminate and sheet vinyl business is sluggish, but LVT and ceramic growth, along with hardwood holding its own, more than makes up for it.
The group has developed a new showroom concept introduced at its summit in Pittsburgh in late September. The “destination” showroom will feature displays in a rich, dark wood with branding in silver. The displays were designed to be customizable for all types of showrooms.
Alliance has also redesigned its website and added three new staff members to its IT department to further develop SEO programs. The new site, rolled out at the beginning of this year, has a customizable template and features a large About Me page. Two thirds of members use the group website.
A recent survey of members revealed that what most of them want to see addressed in the coming year is exclusive promotions, of which they currently do four a year, as well as exclusive blankets, which means a sub-selection of colorways (say, 12 key colorways out of a running line of 40 for a given mill) that are better priced and always in stock.
Co-founder Ron Dunn and his wife Sandy recently completed their annual RV tour of members. It takes about five years to complete a full circuit. This year’s tour focused on the Mid-Atlantic region, from the Carolinas all the way to upstate New York. Most members reported positive results, though the Virginia and West Virginia markets are still depressed.
Next year will mark Alliance Flooring’s 20th anniversary, which it will celebrate at its February convention.
The National Floorcovering Alliance (NFA) is a group of high-powered retailers that are often leaders in their regional markets. While many members focus on the higher end of the market, others carry a wider range of price points. Currently, there are 42 members in the NFA.
In September, the group celebrated its 25th anniversary at its fall meeting in Aruba, with 150 people in attendance. Almost all members reported that sales were up, mostly by high single digits and low double digits, with a couple of members reporting flat sales and only a single member reporting a drop in revenues. Floor Focus’ Top 100 list is heavily populated by NFA members, second only to FEI members.
At the meeting, the group announced a new vendor program with US Floors offering exclusive product and content. US Floors’ Coretec WPC product has been the most popular product in the retail market for the last couple of years, though now it is competing with a growing list of manufacturers, both foreign and American, offering similarly constructed products.
Like most retailers, NFA members have been developing strategies to accommodate the shift to hard surface, which seems to have accelerated over the last 18 months, due in large part to increased demand for LVT and WPC products. Many are adjusting their displays, shifting hard surface to the front of the store, where carpet has traditionally held sway.
Another leading concern for group members is staffing, both in sales and installation, so there was a lot of discussion at the meeting about hiring, training and maintaining sales staff, as well as finding and keeping installers. Members are also working on Internet marketing and strategies for targeting Millennials, which a few years from now will become the largest purchasing group.
At the meeting, the group unveiled a couple of TV commercials for group members, who will customize them and add their logos for ad campaigns that will start airing before the end of the year.
Creating Your Space, which provides retailers with a suite of online tools from fully customized websites to a range of services for generating leads and building and sustaining relationships, was first launched in 2005. Currently, it serves over 350 dealers in about 750 locations. Last year, it rebuilt its website and marketing platform to be, among other things, responsive to different devices, and the firm reports that close to 90% of its clients have converted to the new systems.
At this month’s annual conference at the Silverado Resort in California’s Napa Valley, Creating Your Space is soft launching an automated email marketing program that will fulfill functions that many dealers have been doing manually, like sending potential clients (that have reached out for information) a thank you note and coupon within 24 hours, a follow-up letter within a week and another within a month—or following flooring installations with similar correspondence, including review requests, referral offers and cleaning service opportunities. The rebuilt platform also includes trending video programs, along with other information about design and style trends and how they tie into interior products.
Sister company Bridgeway Interactive, which serves builders and residential contractors, also upgraded its platform last year, among other things adding more integration with its members’ existing customer base, also eliminating a lot of manual functions. One of the popular new tools with the redesign is an online appointment-setting program. Bridgeway was first launched as part of Design Center Solutions in 1999 and was rebranded as Bridgeway Interactive in 2005. Creating Your Space is bigger in terms of clients, but Bridgeway is about the same size in terms of member revenues because it has larger multi-location clients.
Home Centers and Chains
While discount chain stores tend to focus on rugs, from area rugs to bath and scatter rugs, the home centers, like Home Depot, Lowe’s and Menards, sell a much wider range, including carpet, resilient flooring, hardwood, laminate and ceramic. Overall, flooring sales at the home centers are up around 4%, with carpet sales down by low single digits and hard surface flooring up by high single digits.
Carpet is a challenge at the home centers, mostly because carpet requires a lot of service and it doesn’t fit the cash and carry business model. Menards’ carpet business is estimated to be down by double digits, while it’s closer to flat at Lowe’s and Home Depot. Lowe’s exclusively offers Stainmaster’s PetProtect carpet program, which has been extremely popular.
However, as carpet loses share to hard surface, it’s likely that these home centers will adjust their merchandising and space allocation with more floor space for hard surface.
Ceramics have a fairly strong position at the home centers. Daltile, for instance, has a substantial offering at Home Depot. New printing capabilities that confer convincing hardwood visuals to ceramic and porcelain tile have helped drive sales. Home Depot is stronger in ceramic, and Lowe’s is stronger in hardwood.
Those same convincing hardwood visuals are also well represented in luxury vinyl and even sheet goods. Home Depot was an early adopter of LVT with Metroflor’s Allure, but since then the other home centers have come on strong, particularly with WPC products, where Home Depot is lacking. Shaw has a big resilient program with both Menards and Lowe’s, as does its latest acquisition, US Floors, and resilient sales for those firms are likely up at least 15%. Home Depot’s resilient sales are estimated to be up by single digits.
Hardwood sales are relatively flat at the big boxes, with engineered wood ceding share to lower priced options with hardwood visuals, like luxury vinyl plank and laminates.
Laminate business at the home centers has been fairly robust, in part at the expense of Lumber Liquidators. At Home Depot, Pergo Outlast+ with its enhanced water resistance has been well received, and fashion forward hardwood visuals have also been driving sales. Laminate sales at home centers are estimated to be up by high single digits.
However, it looks like Lumber Liquidators is weathering its storm, having taken appropriate action to ensure that its products are under formaldehyde limits. These days it heavily vets its supply base, including its Chinese suppliers, to ensure that regulations are being followed.
Rugs are sold at the home centers as well as chain stores from Walmart to Bed Bath & Beyond. In all, it’s a $2.4 billion business at wholesale, or close to $5 billion at retail. The biggest piece goes to mass merchants and clubs, followed by online sales, then department stores and specialty chains. Catalogs and furniture stores account for a smaller percentage, but the smallest piece of the pie is served by the independent specialty flooring retailer.
In terms of the home centers, Lowe’s dedicates more space to rugs, about 48 linear feet per store, compared to just 16 feet per store at Home Depot. However, Home Depot has higher traffic. Rug sales are up about 2% at Lowe’s and flat at Home Depot and Menards.
Copyright 2016 Floor Focus